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No more electricity buybacks at Eskom, regulator confirms

National Energy Regulator of South Africa says it will not allow Eskom to continue with its costly electricity ‘buyback’ programme

THE National Energy Regulator of South Africa (Nersa) has confirmed that it will not allow national power utility Eskom to continue with its costly electricity “buyback” programme, as it expects the power utility to have excess capacity by 2019-20.

Thembani Bukula, regulatory member for electricity at Nersa, told Parliament’s portfolio committee on energy on Wednesday that buybacks were not allowed in the third multiyear price determination for the next five years. It only allows the utility to raise prices 8% a year during this period. Eskom implements electricity buybacks by paying a large user, such as an aluminum smelter, to stop production so that it can supply energy to other users.

Going into June, many intensive users automatically reduce demand by shutting down heavy smelters and plants that consume the most electricity in response to higher winter tariffs, meaning Eskom does not have to rely on buybacks in peak winter months.

Industry experts said this week, however, that ending buybacks would put the utility under even more pressure to keep South Africa in power, given its thin reserve margin. But Mr Bukula said the regulator believed these buyback schemes cost South Africa too much and were unnecessary. He also told the committee that when determining Eskom’s latest tariff application, the regulator had learnt from previous applications that the power utility had enough margin to pay off its loans. Mr Bukula said that in terms of the previous applications, Eskom’s earnings before income tax, depreciation and amortisation (ebitda) had fallen below 2% at times, but this had not been an issue. “When ebitda falls below 1%, then we will have to talk,” he said.

Nersa wants the entire process of demand supply management to be taken out of Eskom’s hands, if possible. Mr Bukula said the utility faced a possible conflict of interest if it sold power while also responsible for reducing use. “If I sell bread, then I want to sell as much as possible. It is the same with Eskom,” he said. Electricity analyst Chris Yelland said Eskom could have continued paying big consumers not to use its electricity, if Nersa had not prohibited it from passing on the cost of such activity to the consumer. “They can fund it themselves, and for that they’ll have to reduce profitability,” he said. The state-owned electricity company made a profit of R12.63bn in the six months to September.

Ending the buyback programme would place extra strain on Eskom’s ability to keep the lights on as it will not have the incentives that keep big users out of the system, said Peggy Drodskie, chief operating officer of the South African Chamber of Commerce and Industry. “That could have a slight impact for Eskom to keep the lights on as it will then have to only rely on the goodwill of people to reduce demand,” she said. With Sikonathi Mantshantsha